Microsoft FYQ3 On Tap: Cost Cuts, Nokia Hardware in Focus

By Tiernan Ray

Microsoft (MSFT) shares are up 10 cents at $44.93 as the company rolls toward its fiscal Q4 report this afternoon, after the closing bell.

The Street is modeling revenue of $$22.99 billion and EPS of 60 cents.

The Street is bracing for more insight into a number of moving parts for Microsoft, including the announcement last week of 18,000layoffs, and the first quarter in which Microsoft will report the former Nokia (NOK) phone business as a separate line item Microsoft’s income statement, as the company mentioned last week.

CLSA Asia-Pacific Markets‘s Ed Maguire, who has an Outperform rating on the shares, writes today that “we’re not looking to 4QFY14 results to drive meaningful upside” in share performance, given the stock has been blowing through multi-year highs of late.

But he does see upside to consensus, with Microsoft delivering perhaps $23.3 billion and 63 cents a share, in large part from the end-of-life of Windows XP this past spring.

However, “Enterprise remains the key to the story in our view; we will need to see
re-acceleration of bookings from 6% YoY in 3Q to drive shares higher.

A “wild card” is what the company will report for Nokia:

Microsoft will disclose a phone hardware segment under devices and consumer group for the acquired Nokia business. While Microsoft by dint of scale can absorb Nokia’s margin dilution, it’s unclear to what extent management may try to guide revenues in light of sustained 30% YoY declines and lack of meaningful share gains against Apple and Android.

Also today, Mark Moerdler of Bernstein Research reiterates an Outperform on the stock, and forecasts revenue of $21 billion, excluding the Nokia unit, writing that “consensus estimates will not be as good a measure this quarter given the fact that many including ourselves did not include Nokia; some may have included stronger PCs as discussed in Intel’s recent earnings; and some may have updated to include some cuts.”

The layoffs could be just the start of the cost cuts to come at Microsoft, he opines:

We estimate cost savings of ~$1.6B to ~1.8B in annually from the cuts of ~12,500 Nokia and Windows Phone employees plus 5,500 Microsoft employees, assuming non-manufacturing jobs have an average annual salary of $80k – $100k. This would translate to an EPS boost of $0.19 to $0.22 above baseline estimates, given the current share counts [...] – We are also not including secondary savings that could occur. For example the closing of Xbox Studios will cut costs relating to making shows and movies that are not employee related. Another example would be advertising savings from cutting some Nokia products (e.g. feature phones).

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.